Factory output plunges, gas costs boost inflation, retail sales

WASHINGTON (AP) -- Four government economic reports out Friday paint a mixed picture of the economy's health. One bright spot: consumer inflation remains in check, which can contribute to increased household spending.

A day after the Federal Reserve launched an unprecedented program to boost economic growth, it reported that industrial production fell in August by the largest amount in more than three years.

Factories produced fewer cars and other manufactured goods, and Hurricane Isaac triggered shutdowns along the Gulf Coast.

Industrial production dropped 1.2% in August compared to July, the Fed said. It was the biggest setback since a 1.7% decline in March 2009, when the country was in recession.

Manufacturing output, the most important component of industrial production, fell 0.7%, led by a 4% drop in output at auto plants. However, even with the August decline, output at manufacturing plants is still 20.7% above the recession low hit in June 2009.

Manufacturing helped lift the U.S. out of the Great Recession, but it slowed in the spring as consumers cut back on spending, businesses invested less in machinery and global weakness hurt demand for U.S. exports.The weakness in manufacturing in August was widespread. Production fell at factories making machinery, computers, airplanes and furniture.

That report is in stark contrast to a government report out Friday which said companies restocked their shelves in July at the fastest pace since January, while their sales increased.

The Commerce Department said business inventories grew 0.8% in July, up from June's 0.1% gain. Sales jumped 0.9%, the most this year, after a steep fall in June.

The biggest growth in stockpiles was among retailers and auto dealers. Stockpiles at manufacturers and wholesalers rose more slowly.

Companies typically boost stockpiles when they anticipate sales will rise in coming months. Faster restocking helps drive economic growth. When businesses order more goods, it typically leads to more factory production.

Total business stockpiles rose to $1.6 trillion. That's nearly 21% higher than the low reached in September 2009, when businesses were slashing inventories in response to the recession.

Wholesale stockpiles account for about 27% of total business inventories. Stockpiles held by retailers make up about one-third of the total and manufacturing inventories represent about 40%.

In a third report out Friday, the government said retail sales rose in August from July because consumers paid higher gas prices and bought more cars and trucks. They were more cautious elsewhere, suggesting the weak economy has made many selective about spending.

Retail sales increased a seasonally adjusted 0.9%, the Commerce Department said. Gas station sales jumped 5.5%, the most in nearly three years and a reflection of sharp price increases. Demand for autos increased 1.7%. Automakers earlier this month reported the best sales in three years, after seeing rising demand for pickup trucks.

The government's retail sales data contrasts with reports from the nation's largest retail chains. Many said things picked up in August, driven partly by back-to-school purchases. Sales at 18 retail chains rose last month by the most since March.

The retail sales report is the government's first look each month at consumer spending, which drives roughly 70% of economic activity. Consumer spending has increased at a slow pace this year. That has dragged on the economy and kept businesses from hiring.

"This has to go down as a weak report," said Paul Dales, senior U.S. economist at Capital Economics. "Most of the spending in August was on products that households have to buy, such as gasoline, not items they like to buy, such as new TVs."

Rising gas prices could make consumers more cautious about spending in the coming months. Gas prices averaged $3.87 a gallon nationwide on Friday, 16 cents higher than a month ago and just 7 cents below the 2012 average high.

Higher gas costs also drove up consumer prices by the most in three years, the Labor Department said in a separate report. But excluding energy prices, inflation was mild.

Consumer prices rose 0.6% in August, the department said. Gas prices increased 9% and accounted for 80% of the increase. The modest increase in food prices indicates the drought in the Midwest is not yet pushing up grocery prices. Some economists say that will happen in the comings months.

Lower inflation will allow the Fed to stick with programs announced Thursday aimed at lifting the economy. If the Fed were worried that prices are rising too fast, it might have to raise interest rates.

On Thursday, the Federal Reserve said it would purchase $40 billion of mortgage-backed securities a month until the economy and job market show signs of steady improvement. Fed officials also said they would keep short-term interest rates low, even after the acceleration of any economic recovery.

Hiring has weakened recently after a strong start to the year. Employers added only 96,000 jobs in August, below the 141,000 added in July and far below the average gains of 226,000 in the first quarter.

The unemployment rate fell to 8.1% from 8.3%, but only because the number of people in the work force shrank.

For now, the economy isn't growing fast enough to spur greater job gains. The economy expanded at a 1.7% annual pace in the April-June quarter. That's down from 2% in the first quarter and 4.1% in the final three months of last year.